This morning saw the launch of a plan for giving away bank shares from Liberal Democrat MP Stephen Williams. Laid out in a pamphlet published by CentreForum, Stephen Williams’s plan is to give shares owned by the government in the banks to everyone on the electoral register. A floor would be set so the shares could not be sold until they had passed the price paid by the government and individuals would only keep any gains made above that floor price. In other words, as the shares rise in price and get sold the government gets back the funds it put into the banks and, if the banks do well, the public gets to profit from that.
It’s a neat idea, and one of the first substantive plans for what the government could do with its 83% of RBS and 41% of Lloyds. As is to be expected with any plan for such a controversial area, it raises a number of questions.
First, the government only gets back the money put into the banks if people sell their shares. If people hold on to them, those funds do not come back to government – and in particular that means a large source of possible government funds ends up being highly dependent on what can be very volatile stock markets. Such uncertainty would apply to other policies too – including direct government selling of shares on the stock market – but it is still an issue.
Second, even leaving aside the uncertainty, would this route raise more or less money for the government than a straight-forward sell off of shares? Stephen Williams and colleagues think so, as their Q&A explains,
The absolute and relative size of the Government’s shareholdings in Lloyds Group, and RBS make it conventional exit through share sales impossible at a reasonable price. In other words, shares would have to be sold at a substantial discount over many transactions over a number of years. This increases the risk that the public would never get its money back – as has happened in the US, where the Obama Administration has lost at least $10bn in selling a tranche of its GM shares.
Third, the degree to which shareholders have failed to hold boards of directors to account has been bad enough even with big institutional shareholders, let alone with mass small-scale shareholdings. But given how poor institutional shareholders have been, would this situation really be that much worse?
Fourth, by giving the same amount of shares to everyone, there is a neat piece of simplicity combined with fairness. Because the sale of shares would be subject to capital gains tax, the initial allocation of shares would have the virtue of simplicity whilst subsequent capital gains tax revenues would mean that the richest end up paying more of what they have been given back in tax.
Fifth, although I said “simplicity”, relying on the electoral registers raises issues of principle and practicality. The principle is about whether the electoral register should be used solely for electoral purposes. The practicality is about the accuracy of the electoral register. The offer of money in return for being on the register would most likely be an extra incentive for people to register, but what about then deliberate fraudulent register entries? Having a system that is resistant to fraud makes the idea not quite as simple as it looks at first.
(Strictly speaking, it’s not just the electoral register the proposal uses. As the Q&A explains, shares would go to “those on the electoral roll for UK elections who are resident in the UK for tax purposes. In addition, non-UK nationals serving in HM Forces and their dependents should be eligible on the same basis”.)
In other words, there are plenty of questions that the scheme raises, but as this is a proposal designed to help set the political agenda rather than a finely worked out imminent piece of legislation, that is as much a compliment as anything else. It’s a good contribution to the debate.
The Facebook page to support this proposal is at http://www.facebook.com/supportpublicshares.
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24 Comments
The electoral register would be unfair. Even if it includes EU nationals (ie not just the parliamentary election one like for the referendum), there’s still plenty of non-EU, non-commonwealth (ie people that cannot be on the register) taxpayers in this country.
A fairer way would be the National Insurance register.
But another problem is that banks charge fees just to hold shares, and on a small number that could easily wipe out any gain, even cost money.. for poorer people it’s a concern.
Does this amount to anything other than a deferred tax cut? I thought we were supposed to be desperate to reduce the deficit at all costs.
Oddly enough, It sounds remarkably similar to what Gaddafi is doing in Libya at the moment.
Absolutely ridiculous idea.
The direct investment in banks equates to £125 billion that we should eventually recoup when we sell the shares according to the National Audit Office.
The country is broke but wants to give away assets….
This is a stupid idea. The Government should sell the shares over an extended period whenever the share price allows a reasonable profit. If there is then a will to give away some of the money let it be to those who need it most, or to fund projects of community benefit or those that would help people help themselves.
By doing this the true cost of the financial crisis to Government will never be known. Labour will cry foul and state that the Government would have done better selling the shares, and the Tories and Lib Dems will use the lower figure to show Labour in a worse light.
I don’t need a few hundred pounds, I would like to be given money as would anybody, but that is not the point. The pensioner struggling to pay their heating bills needs help, the disabled person trying to get back into the workplace needs help, the Schools losing their budget or having to grow in size without corresponding budget needs help etc etc etc.
Give the shares to charities working for the disadvantaged in society under the same rules maybe, but I’m afraid as it stands it has all the hallmarks of an attempt to buy votes before 2015.
Personally would tell Sid to sling his hook as this proposal is not really different from the Gas privatisation he was so interested in. Long term it will not help to redistribute wealth nor will it challenge the excessive risk taking of the banks or force bankers to live the real world over pay.
One of the key structural problems with the banks is the dominance of one model of ownership-share ownership. Managers have as their prime objective increasing share value-hence the excessive risk taking since they know they are ‘too big to fail’.
If we genuinely want to challenge the banks we need to promote alternative models of ownership. Williams’s proposal does not do that.
If the banks were mutualised the asset would be owned long term by the members and the value would be locked in. The managers would then concentrate on serving their members interests. Region mutual banks could be set up redistributing jobs away from London to the regions. The taxpayer could get their stake back over the medium term.
I am highly suspicious of a proposal that comes out days before a conference with a high powered launch. The banks collapsed ages ago. If this proposal had been published earlier it could have received proper scrutiny. Instead it strikes me that we are being bounced. We are now promised an Emergency motion at Sheffield.
If sold in this way the banks will eventually land up in the hands of the same shysters with the same business model that got us into the mess in the first place.
I regret that I shall not be able to deposit my cash in the Lancashire Mutual but rather have to hand it over to Bob Diamond or one of his friends
Isn’t the government getting a dividend from the shares at the moment? What’s the rush?
A rather expensive and complicated way of giving tax cuts. Obviously stupid idea is obviously stupid.
I have to say I share the scepticism of the commentators above. This is a bad idea on every level.
I’ve set out some of these in a piece I wrote for the IEA, building on the criticism Dr Eammon Butler sets out at the ASI.
To take each of your points in turn:
1) The government needs all its money back, and preferably a profit, ASAP so that it can pay down the debt, which will be nearly £1 trillion by the end of the year. (Note that this one-off windfall is of no use in controlling the deficit but can help bring the overall debt down). This is more important than giving everybody a small, deferred windfall.
2) There is no reason why the government could not sell the shares in tranches to ensure that they don’t depress the price. In fact, knowing that millions of shareholders are sitting on shares they don’t want is just as likely to depress the price – especially as the individual shareholders cannot coordinate their action to benefit from a rising price.
3) The institutional shareholders might not have been great, but the idea that 60 million shareholders who each hold an infinitesimally small share will be better is naive.
4) Actually, it’s quite the opposite of fairness. The public debt will fall unevenly, as those who pay more tax have to shoulder more of the burden. Using the shares to pay off the public debt relieves that burden in proportion to the amount each person is going to pay. Giving the shares away gives everybody the same amount of benefit from bank bail-out costs that were not shouldered evenly. It certainly is an example of redistribution, but a particularly unfair one.
5) It’s absurdly expensive to send out 60 million share certificates. And the electoral role is highly inaccurate, as anybody who has stood in an election can tell (I reckon 10-20% of the people on the role in my ward have moved away without telling Electoral Services). Of course, the current census does offer an opportunity to clean it up but I bet the left hand doesn’t know what the right hand is doing.
One last point to Depressed Ex. I don’t think this is a deferred tax cut. I think it is a cash give away that will need to be clawed back later in tax as the national debt spirals upwards.
Ben and Steve are right. To elide their comments: “Absolutely ridiculous idea. The country is broke but [the proposal is] to give away assets.”
Depressed, Amy, Ben & Steve: The report directly addresses the question of whether or not giving shares to the public will reduce the amount the government ends up with in cash to pay off debt. As I quoted above, Stephen Williams said,
“The absolute and relative size of the Government’s shareholdings in Lloyds Group, and RBS make it conventional exit through share sales impossible at a reasonable price”
and the report goes on to argue that getting the floor price back plus tax on future profits therefore financially makes sense for the government and is a good way of reducing the debt.
I’m still looking at other evidence before making up my mind as to whether or not I agree with that statement from him. From your comments, though, you’ve presumably got good grounds for being sure he’s wrong given what you’ve said above, so would be interested to hear what the reasons are you think, for example, the GM Motors analogy isn’t valid? What, to take Amy’s phrase, is “obviously stupid” about the calculations put forward in the paper?
@Mark Pack
““The absolute and relative size of the Government’s shareholdings in Lloyds Group, and RBS make it conventional exit through share sales impossible at a reasonable price”
I disagree with the report as this assumes selling in the way a major shareholder would. The Government could not, the report is quite right, effectively sell it’s stake over a short time span. Supply would increase supply and diminish demand etc etc. The secret would be to sell in small issues, not planned or advertised to a timeline but when the market supports it. This is why individuals selling shares would, on the whole fare better than the government. To get the most benefit it may takes many tears to sell the shares off, although the same could be said of the proposed scheme.
My main issue is though that this gives a blanket “bonus” to all registered voters. We generally suspect the figures for voter registration tail off at the lower end of the social economic spectrum and therefore some of those most in need get nothing. The Governments logic on Child Benefit (but not the flawed execution) was correct, in times of hardship why give to those who do not really need it.
The country needs the maximum benefit for these shares to go back into the pot to be used as effectively as possible. I fear this scheme will end only really benefit those that can afford to sit on the shares for a time. As I mooted earlier perhaps giving some to charities under the same rules would be an idea I could support but not this…
What’s the “GM Motors” analogy?
Oh, sorry, I see. Another government lost money by selling some shares, so the same would apply to the UK government’s share holdings in the banks? Not the most convincing argument I’ve ever heard.
But the part I’m most sceptical about is the idea that more money can be realised by effectively paying large amounts of commission to members of the public for selling the shares on the government’s behalf. As the government could instead simulate the same process without paying the commission, it doesn’t make sense to me.
I’m no economics whizz, so I fully expect to be told the following is impossible, but…
Rather than dropping a share certificate for a tiny amount into the laps of each voter, incurring lots of fees and running the risk of lost shares, how about this: split HMG’s shareholding of each bank into two. 20.5% of Lloyds and 41.5% of RBS is transferred to a new trust, holding that share of the companies as effectively a mutual on behalf of all that bank’s UK account holders. It isn’t quite as good as totally remutualising banks and former building-societies but it would give members of the trust a new stake in the running of their bank.
The remainder of the stock continues to be owned by the state with any dividend paid to the exchequer. The holding company would be authorised to buy and sell shares up to, say, 5% of the total holding if there was a chance to get a good price and repay money faster. What is more, the government could use these large shares in (operating, now profitable) banks to develop a further portfolio of property and assets – both as investments and, importantly, in the form of new infrastructure such as social housing stock, renewable energy, roads and railways. In effect, the government could become *its own* PFI partner, providing capital for public projects without having to charge itself exorbitant rates or unfair terms.
Norway did something similar with its oil income and is now one of the world’s biggest sovereign wealth funds. I doubt Britain would quite end up like that, but this could be a start.
@Mark Pack and for others interested
Please take a look at Part 3 from the NAO report
http://www.nao.org.uk/idoc.ashx?docId=af0e46bb-a3f0-4525-af51-5c569d0ca097&version=-1
It talks about staging the sale in Tranches.
Also Interesting to Note is that the US Govt made a $12 billion profit on their Citigroup holding. I didn’t see that mentioned for some reason did I? 😉
some of the crituicisms ere are strange
“the government needs all its money back”
well yes it does, but needing wont make it so…..and just selling the shares onto the market wont garauntee that.
secondly this proposal gets the government its money back, the taxpayer keeps the profit.
its smarter than a tax cut because tax cuts require buracracy to implement this shouldn.t
In theory this is another example of intergenerational theft. Those who are not yet on the electoral register don’t get any shares and instead get to pay back the debt incurred to buy the shares that are now being given to their parents and elder siblings.
The history of such sell offs is that they do little to help spread wealth in the long term. Far better to pay off the national debt by selling them off gradually in tranches.
Blimey, you’re joking, aren’t you?
The bureaucracy would be NIGHTMARISH. Leaving aside the issues of people registering fraudulently (or people who are legitimately registered in more than one place), you’ve got to have not only a mechanism for distributing the shares, but also a mechanism for preventing them being sold below a certain price and another mechanism for reclaiming the money from people after they’ve sold them.
As far as I can see the only way it would be remotely feasible would be for the government to hold and sell the shares on people’s behalf. That would still involve a pretty complicated bureaucratic machine, but more importantly it would defeat the whole (supposed) object of the government NOT selling the shares!
@David thorpe
“the taxpayer keeps the profit”
No, even if the scheme was to work it would be those registered to vote who get the profit.
Depressed Ex: There is already a perfectly good mechanism for doing this, it’s called a share option. You give every citizen a certain number of open-ended call options with the strike price being the government’s chosen sale price.
At any point in time, the citizen calls their option, buys the shares from the government at the strike price (which gets the government their money) and sells the shares on the open market.
Administratively, it really should be just a matter of printing that number of option certificates and posting them out to everyone on the electoral register. Price: 48 million second-class stamps, plus the paper and envelopes. About £10m.
There would be an administrative cost when the options are exercised, but not all that much. Really – LIFFE already has the administration in place.
@Mark
“The absolute and relative size of the Government’s shareholdings in Lloyds Group, and RBS make it conventional exit through share sales impossible at a reasonable price”
No Mark the report does not adress this …the report mearly states this as some kind of magical self evident truth .
I am shocked that at a time when the Con dem coalitition seems happy to slash social denefits saddle students with a mountain of debt etc that such an idea can even be thought of let alone taken seriously by a Lib dem Voice commentator (Please tell me your playingh devils advocate here mark ???) .
Pleanty of other commentators have given mechanisms for selling shares in tranches etc even forgetting about this the govenment will soon start to earn a good tranch of dividends which it can use to reduce the national debt.
How can Lib dems play the ‘forced to have a coalition to reduce the national deficit card ‘ again and again and the get enthused by such a stupid contridictory policy such as this.
Richard
Be that as it may, giving people share options is not what’s proposed in the document above. The idea is really to transfer the shares to people immediately, and set up nominee accounts for everyone on the electoral register.
I still don’t understand how it would work in practice, but I don’t really think the logistics are the main objection anyway. I find it offensive that we’re being faced with massive cuts to public services on the basis that the nation’s finances are in such a disastrous state that there’s no other option – and then some bright spark comes along and blithely suggests the government should simply give away more than £100bn worth of assets. It’s completely nonsensical.
John: As the report points out, past mass sales of shares by the government have repeatedly been followed by large rise in share prices and widespread complaints all round that the shares were sold at too low a price. Given that’s happened many times, it seems to me absolutely right to ask the question, “Is that an almost inevitable problem which means that a different answer should be found?”
Of course, having something repeatedly go wrong in the past doesn’t always mean that trying it again is the wrong thing. Whether due to experience or blind luck, sometimes it goes right the next time you do it. But what should shock you, surely, is the suggestion that despite that dismal track record, doing the same thing again is the only the route that should be considered. The idea that the only thing we can do is what we’ve done before, whether or not it worked before, is rather a conservative view after all 🙂
Ben: Thanks for the NAO report. It makes the point several times in different ways that getting full value from the government selling its shares would be difficult – so actually that rather reinforces one of the points in the Stephen Williams proposal that a radically different approach may be the best way of maximising the government revenue, doesn’t it?
Moreover, given the NAO report talks about the difficulties in getting full value from straight forward government sales, the report rather undermines the comments from some people higher in the thread the selling off the shares is an obviously straight forward and easy way to get the most money.
It seems to be talking about the initial offerings when companies were privatised in the 1980s, not about the sale of shareholdings in companies whose shares are already being traded. Obviously that’s completely different.
How is it “radically different,” though? The only essential differences are that (1) the shares would be sold in small tranches at unpredictable times and (2) all the proft would simply be given away by the government. Why not do (1) but not (2)?